In simple terms, Supply chain management (SCM) is considered the management of the information or data and materials across the whole supply chain, from the purchasing of raw material to the distribution of the product or service to final consumers.
In other terms, SCM is a mechanism to handle the whole production flow related to a product or service. This starts with the raw materials and ends with delivering the final goods to the customer. A network of suppliers that are referred to as links in the supply chain; is created by an organization that is responsible for product movement between raw material suppliers and organizations that have direct dealing with users. So, through the supply chain management process, an organization is able to source raw materials or components required to develop a product or service and distribute those products or services to the final destination i.e. customers.
Supply chain activities include purchasing of materials, management of product lifecycle, supply chain planning, logistics, and order management.
Need and Objectives
An organization considers SCM as a tool that enhances the effectiveness of the management and includes the below objectives at the organizational level:
- Inventory reduction.
- Enhancing empowerment and participation.
- Increasing the effectiveness of existing systems at a functional level such as Accounting software, ERP (Enterprise Resource Planning), Documentation like Financial statements/Financial reports/documents related to ISO standards.
- Integrates multiple systems such as ERP, documentation and communication systems, R&D (Research and development) systems, etc. effectively.
- Encourage optimum resource utilization such as manpower, material, capital, equipment.
- Optimize the money flow cycle i.e. within the firm and from external parties.
- Enhances the value of operations, products, and services. These enhancements ultimately enhance an organization’s profitability.
- Increases customer satisfaction level and also, satisfaction level of clients, statutory control organizations, supporting agencies, vendors and suppliers, employees, and other executives.
- Enhances an organization’s flexibility to support smooth implementation of different schemes such as expansion plans, modernization, diversification, mergers & acquisitions.
- Enhances the correctness of MIS (Management Information System).
It is easy to apply and integrate SCM with the following:
- ERP systems
- Design software or systems such as Pro-E, Auto-CAD
- Research & development systems
- Systems related to costing
- Manufacturing systems
Below steps are involved in the SCM implementation process:
- Analysis of an organization’s strengths and weaknesses along with external agencies.
- Understanding the objectives of the organization.
- Analysis of the existing systems of an organization and identifying any gaps and offering solutions to remove any discrepancies.
- Evolving consensus.
- Solution integration.
- Analyzing the overall impact once the implementation of all proposals of a section is done.
- Finalizing the document of SCM, circulating, and implementing it.
SCM- The Breakthrough Article
A supply chain is considered a network that includes facilities and distribution options to perform the task of material procurement, transforming materials into intermediate and finished goods, and further delivering these final goods to end-users or customers. Both manufacturing and service industries use SCM, although the chain may be complex in different industries and firms at different ratios.
An example given below illustrates an easy supply chain related to a single product. In this example, the raw material is purchased from a supplier, converted into the final product in a single step, delivered to distribution centers, and finally to end-users.
Multiple end products are there along with shared components, facilities in realistic supply chains. Moreover, it is not necessary always that material flow is through a defined network path and different transportation modes may be included.
Decisions related to Supply Chain
There are two main categories of supply chain decisions i.e. Strategic decisions and Operational decisions.
These types of decisions are those decisions that are taken from a strategy point of view and are generally meant for a longer time period. Moreover, strategic decisions are closely related to the corporate strategy of an organization and provide guidance to supply chain policies from a design point of view.
These decisions are taken for the short-term and majorly focus on day-to-day activities. Operation decisions include an effort to manage the flow of products in the supply chain effectively and efficiently.
The main decision areas in SCM are as mentioned below:
The first step in developing a supply chain is to make decisions related to placing production facilities, sourcing, and stocking points geographically. The facility location includes investing resources for long term planning. After determining the production size, location, and quantity; possible ways to supply a product to final customers can be identified. These types of decisions are beneficial to a firm as they specify the basic strategy to access markets of customers. An optimized routine should be there to determine these decisions that include the cost of production, tariffs, taxes, duties, distribution costs, local content, and production limitations. Despite being strategic in nature, location decisions can also be implemented on an operational level.
Strategic decisions related to producing what type of products and using which plants for production in allocating vendors to plants, plants to DCS (distributed control system), and DCS to final customer markets come under production decisions. These decisions greatly affect the costs, revenues, customer service of an organization. The exact path of product flow is determined from these decisions. Detailed scheduling of production is also a focus area of operational decisions. These types of decisions consist of constructing master production schedules, machine production schedules, and maintenance of equipment.
These decisions provide ways to manage inventories. Inventories can be found in the form of raw material or semi-finished or final/ finished goods in the supply chain. These can also be seen as work-in-progress between different locations. It acts as a buffer against any uncertain situations that may occur in the supply chain. These inventory management decisions can be looked at from an operational perspective and include different strategies control policies such as determining the optimum levels related to order quantities, setting levels of safety stock at each stocking location.
These decisions include making long-term decisions to ensure the availability and appropriateness of transportation modes for the purpose of freight movement. The decisions should be taken such as the appropriate type of primary transportation mode for each general flow in terms of product or location.
Approaches to Supply Chain Modelling
Supply chain modeling term is related to different processes utilized over the years for the purpose of defining, determining, and understanding the supply chain of an organization. Through supply chain modelling, it is easy to identify the different unique supply chain needs of different types of businesses. Some businesses need the supply chain to gain the benefit of unpredictable demand; whereas, businesses that are competing in highly competitive markets, use the supply chain for efficiency.
Supply chain modelling deals with aspects such as what needs to produce, searching for best suppliers, market identification, transportation, inventory, warehousing strategies, plant locations, supplier locations, and distribution of final goods.
Modelling approaches can be categorized into three areas:
The network design methods generally include the four main decision areas i.e. location, production, inventory, and transportation. The main focus of these methods is the design aspect related to the supply chain, network establishment, and the associated flows. On the other hand, rough-cut methods provide policies for guidance to make operational decisions. Typically, a single site is assumed by these models, and supply chain characteristics are added to it. Through the simulation-based method, it is possible to analyze the comprehensive supply chain model by considering both operational and strategic elements.
The above three modelling approaches are discussed below in detail:
Network Design Methods
These methods are used to determine the production location, sourcing facilities, and delivery paths. These methods are generally used at the initial stage of a new supply chain and work on a large scale. In basic nature, decisions made through network design models are more strategic as compared to operational.
Rough Cut Methods
These models include more tactical or operational decisions. These methods are also considered multi-level inventory control models.
Simulation is another type of supply chain modelling that supply chain management uses. This modelling is dynamic in nature and can be used to examine the dynamic nature of a supply chain.
Supply Change Management- A Global Perspective
SCM is considered the practice through which the flow of products, services, finances, and information can be coordinated during their movement between raw materials and supplier of parts, manufacturer and wholesaler, retailer and customer. This process consists of generating orders, taking orders, information feedback, and the delivery of goods and services on time and efficiently. In other words, SCM allows an organization to receive the right products and services at the place where they are required at right time and in the right quantity, and at the right cost. To manage this process efficiently, activities such as maintaining relationships with vendors and customers, inventory control, demand forecasting, and receiving constant feedback on the activities at all links in the supply chain are required to manage.
Working Methodology of SCM
Different elements are included in the supply chain such as location, inventory, production, and transportation.
Location: An important aspect of the supply chain is to determine the location of sourcing and stocking points, production facilities. It helps in determining the paths for the flow of goods.
Production: An organization needs to make decisions related to types of product to develop, suppliers to serve plants, way to deliver goods to the customers. These decisions create a great impact on costs, customer service, and revenue.
Inventory: Every stage of the supply chain needs to maintain a certain inventory or materials, subassemblies, parts, etc. as a buffer or stock to meet any future uncertainty and unpredictability.
Transportation: Transportation is required to transfer materials, products, and parts from one link of the supply chain to the next link. Generally, shipping cost is a trade-off against an inventory’s indirect cost to select the best way to transport products or services. For instance, air transport is usually a reliable and fast way for the shipping. If goods are bulky and in large quantities, then shipping by sea or rail may be considered as a cheaper option. So, advance planning is required to ship by mode of sea or rail or air.
Once all elements of the supply chain are determined, the next step is to manage the chain. For this process, three main paths are considered i.e. product flow, financial flow, and information flow. These paths are described as under:
This includes moving goods or products between suppliers and customers including customer returns.
This path involves credit terms, payment schedules and payments, title ownership, and consignment.
This consists of order transmission and updating the delivery status.
Applications of SCM are part of two main categories i.e. planning applications and execution applications.
Through planning applications, the best possible way for material routing, and the number of goods required at particular points can be determined. Execution applications are used to track the physical status, financial data, goods flow, and ordering and delivery of raw materials.
SCM can be implemented in the form of an organization’s different functional blocks that are interconnected and using which, it is possible to develop a product smoothly. Few such functions include sales & marketing, business processes, procurement, logistics, CRM (Customer Relationship Management), costing, financing, manufacturing strategy, process stability, supplier management, environmental requirements, etc.
Definitions of SCM and ISCM
Few definitions of SCM are as under:
According to Beamon (1999), the Supply chain is considered an integrated process through which there is a transformation of raw materials into finished products is possible, and these finished or final products are then delivered to customers.
As per Berry (1995), the Supply chain referred to as a system having constituent parts consist of production facilities, material supplies, distribution services, and customers are linked to each other by feed-forward material flow and information feedback flow.
Kalakota (2000) has defined a supply chain as an integrated process based on the delivery of basic and customized services and such delivery is flawless.
Johnson (1995) stated that the supply chain is a process through which movement and storage of materials, finished inventory and parts can be managed strategically from vendors through the organization and on to the final customers.
If we look at the definition given by Ganeshan and Harrison (1999), then supply chain is considered a network that includes distribution options and facilities to perform the functions of purchasing materials, transforming such materials into intermediate and final products, and further distributing such final products to end-users or customers.
Integrated Supply Chain Management (ISCM)
A process that integrates and manages the supply chain management considering them as a single identity is termed as ISCM. The main elements of ISCM include production, services, vendors, distribution, and customers. There is a linkage between these entities or elements through the feed-forward material flow and feedback flow of information.
Principles of SCM
1. Aligning Supply Chain with Needs of Customers
The businesses and supply chain experts have an understanding of the various needs of customers. To understand customers in a better way, they are categorized into different groups known as “segments” which are small groups of customers. ABC analysis is one of the best ways to segment customers on the basis of profitability or sales volume or types of customers or demographics. It can also be categorized based on industry, product, or trade channel. It is also important to anticipate the needs of customers. Once the requirements of customers are predicted, then the alignment of the supply chain should be done to meet those needs.
So, this principle of SCM suggests that to obtain better efficiency of SCM, it is required to group customers based on their service needs.
2. Customizing Logistics Network
Once the customer segmentation is done according to their different needs, then it is required to design tailor-made supply chain networks to cater needs of different segments. For this, the SCM manager is supposed to set delivery priorities and develop suitable provisions to distribute urgent goods quickly.
So, this principle supports the concept of implementing logistics networks that are distinct and customized for different segments of customers.
3. Aligning Demand Planning by Listening Market Demand Signals
The main focus of this principle is on cumulative forecasting as a business includes different departments such as marketing, production, accounts, purchase, warehousing. Therefore, it is essential to forecast the market demand at a cross-functional level rather than just an individual level. There must be a common goal of each department i.e. cost minimization, reducing the inventory levels, and profit maximization. The whole supply chain must be monitored by SCM planners to find out any early warning signals related to changing demand and needs of customers.
4. Production Differentiation Near to Customers
This principle emphasizes including different variants of a product to fulfill the need for different segments of the customers. Also, some provisions must be made to differentiate products because the demands and needs of all users can’t be fulfilled by a single standard product. Moreover, flexibility must be there for modifying and redesigning the product and its instant availability to the end-users at the expected time. A shorter lead time should be involved in the quick availability of redesigned products or parts. This can be achieved by providing the flexibility of product modification closer to the production end as much as possible.
5. Strategically Managing Supply Sources
It is necessary to do outsourcing strategically. This principle states that in the case of sourcing; having multiple players consider a key through which a competitive environment can be maintained. The smartness of every business is reflected through its ability to realize that one of the indirect costs of the organization is supplier cost.
6. Supply Chain Development with Strategy of Technology
For successful SCM, it is required that information technology (IT) must support various levels of the decision-making process. The IT should be able to capture the data related to the SCM process and also, must be capable of translating that data into useful insights to ensure better business practices and to support real-time operations.
7. Adopting Channel Spanning Performance Measures
The main focus of this principle is on measuring the performance. In absence of regular measuring and monitoring of the performance of a business, it is not possible to determine the success or identify better opportunities. It is required that every SCM must have its own assessment card to highlight the achievement related to its objectives and targets.
Views on Supply Chain
Below are the important views on the supply chain:
- SCM is considered an integrated process through which raw materials are transformed into finished goods or services that are delivered to end-users.
- SCM is a system that includes production facilities, the supply of material, customers, and distribution services that are inter-linked and resulting in information flow and material flow in the system.
- The dynamic system of SCM includes different companies, groups, relationships, and individuals that are both interconnected and interdependent and aimed at customer satisfaction.
- Information is optimized through SCM and the flow of the product is from the procurement of raw material to transferring finished goods to customers. This process includes the vision of obtaining specific strategic objectives such as quality, collaborations, productivity, and innovative service.
- SCM is a process that facilitates the strategic management of the storage and movement of raw materials, parts, and finished goods.
Bullwhip Effect in Supply Chain Management (SCM)
For the success of any business, an efficient SCM system is mandatory. This helps in gaining a competitive advantage as it provides precise information to vendors and due to this, a continuous product flow to customers can be maintained. However, different key factors include in different stages of the supply chain such as supply related demand, time and supply related to order decisions, disorganization, and lack of communication may generate a common setback or problem in SCM. This setback is referred to as a bullwhip effect.
The inventory of any business is directly affected by customer demand. Mostly, organizations gather raw materials and required resources in a suitable quantity to forecast the demand of customers so that the demand can be satisfied in a timely and professional manner. However, mostly there are chances of variations during moving upwards in the supply chain process i.e. from the demand of customers to material suppliers. These variations cause issues of cost, time, and inventory in SCM.
Causes of the Bullwhip Effect
Fluctuations in Price
Mostly, the regular buying patterns of customers get adversely affected by special discounts and other changes in cost. Buyers prefer to take advantage of such discounts that are offered to customers for a short period of time. This results in irregular production and incorrect demand information.
Batching of Order
Batching of order or order batching happens once the order quantities are taken by each member that is received from its downstream customers and they further rounds up or down these order quantities to match production constraints like truckload quantities or equipment setup times. There is the possibility of more distortion in the actual order quantities that were demanded due to the rounding of such order quantities by more and more members.
Information related to Demand
Estimation of information related to the current demand of a product by considering the information on past demand doesn’t include any fluctuations that may arise in demand with time.
Lack of Communication
A difficulty may arise in running the processes efficiently due to a lack of communication among each supply chain link. For instance, the demand for a product can be identified in a different way within different supply chain links and so, different quantities can be orders by different managers.
Policies of Free Return
Sometimes, it is purposely done by customers to overstate demands because of shortages and further canceling the orders at the time of adequacy of supply. In such a case, retailers will keep on exaggerating their needs and order cancellation without return, and this results in excess material.
The Impact of the Bullwhip Effect
The bullwhip effect may impact inventory time, overall cost, and shipping time as the negative impact may cost a lot to the organization. Though businesses work a lot to maintain a useful inventory that can be managed, still, different variables responsible for the bullwhip effect can result in a lack or excess of inventory which can’t be considered as favorable for various reasons. Incorrect inventory levels may occur due to overstated orders.
If the demand for customers doesn’t increase, then it could be the reason for the wastage of resources. Also, insufficient inventory may result in weak customer relations because of unfulfilled orders and products that are unavailable to meet demand. Due to these errors or shortfalls, the profitability and goodwill of an organization are also get affected.
Preventive Measures to Minimize the Effect of Bullwhip
Removing or Eliminating Delays
One way to reduce the bullwhip effect is to remove the delays along the chain. Fluctuations in the supply chain can be reduced up to a great extent (generally by 80%) by 50% reducing order-to-delivery time in the supply chain and its simulations.
Improving Communication and better Forecasts
Better information in the form of improved communication or better forecasts can be utilized to reduce the bullwhip effect.
Better Customer Service and Reducing size of orders
One of the ways to reduce the bullwhip effect includes minimizing the sizes of orders and providing better prices of products. Also, improvement in customer service and removing the reason for cancellations of customer orders ensure smooth patterns of ordering.
Collaborative Supply Chain
The flow of all items included in a supply chain is required to be managed by an organization. Items in the flow include information, materials, money, and services given to customers from different sources. The overall supply chain process can be of three types as mentioned below:
Upstream Supply Chain (Inbound Logistics)
This includes a manufacturing organization’s activities with its vendors.
Internal Supply Chain (In-house Processes)
This consists of different activities that are performed in the manufacturing organization for the purpose of transforming inputs received from the suppliers to the desired outputs.
Downstream Supply Chain (Outbound Logistics)
This involves those activities that are carried out in transferring the final product to the end-users or customers.
Vendor Managed Inventory (VMI)
This is considered a process that includes generating orders by a supplier for its distributor and these order generation is based on demand information forwarded by the distributor. Using VMI, orders are generated by suppliers as per objectives on which mutual agreement is there and these objectives are for demand information received from distributors, inventory levels, and transaction costs. This process includes the backward movement of buying function i.e. from the distributor to the supplier and the responsibility for order placing is taken over by the supplier.
Working Methodology of Vendor Managed Inventory (VMI)
In the VMI process, the data of inventory and sales as per a predefined schedule is forwarded to the distributor. The order that should be placed according to the pre-established criteria defined by supplier and distributor; is determined by VMI. The information related to the inventory status is monitored by the supplier to ensure that appropriate stock quantity is always available with the distributor once required.
Internet and Supply Chain
Technology is considered an organization’s integral component that supports the organization to meet the growing demands. Internet is a technology by using which organizations have gained a lot of benefits. Organizations should realize the importance of the internet and its benefits.
The term collaborative supply chain includes the collaborative use of technology for the purpose of improving the management of supply chains and operations of its activities. Using the internet, an organization can network their different units based at different locations at a long distance for sharing information in a couple of minutes.
Inventory Management in Supply Chain
Stock consists of a detailed list of different items and that is termed as inventory and also known as working capital. Different risks and uncertainty are involved in the usage of such stock items and thus, proper management of such items is required. Inventory is considered an important technique of resource management that is expensive too.
Organizations reduce inventory levels to minimize costs. Often, this leads to dissatisfaction in customers due to stock-out. Costs and benefits can be balanced by making a balance between inventory’s extreme levels. To analyze an inventory issue, probabilistic models can also be utilized.
Financial Supply Chain
An effective SCM is only possible if the balance between inflows and outflows of funds is streamlined.
In simple terms, the financial supply chain is related to the monetary transactions between trading partners to support production, sales & purchase of goods and services.
In other words, financial supply chain management includes those holistic activities required to plan and control all financial processes that are suitable within the organization and to communicate with other enterprises.
Objectives of Financial Supply Chain Management (FSCM)
The main objectives of FSCM are as under:
Fiscal Discipline and Control
This includes creating awareness of the necessity to understand the importance of managing and protecting funds and maintaining an internal system by functionaries.
Integration of Information Networking
For the better functioning of a well-designed SCM, it is required to have an information networking system that is designed scientifically.
Integration of SCM with finance provides an ideal platform to have greater clarity related to the balance between justified and unjustified inventory.